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Trends and climate
How would you describe the current merger control climate, including any trends in particular industry sectors?
Recent merger control investigations carried out by the Competition and Markets Authority (CMA) place increased emphasis on data-led evidence, with a particular focus on merger parties' internal documents. The CMA now expressly recognises the importance of the merger parties' internal documents for its investigations, as stated in its recently published guidance notes to the revised merger notice template, published in September 2017. The CMA has indicated that it intends to use ‘as standard’ its statutory powers to require merger parties to produce responsive documents, rather than relying on informal requests for information.
The CMA is also using recent investigations to develop its frameworks of analysis – for example, in relation to input and customer foreclosure theories of harm (Tesco/Booker (ME/6677/17)) – and revisit previously established market definitions (Heineken/Punch Taverns (ME/6656/16)) where it considers that the evidence supports a change in approach.
Further, senior CMA officials have publicly stated that while the CMA and its predecessors may have historically been overly optimistic about merger parties' arguments in relation to entry and expansion, such arguments will need to be supported by robust data going forward.
While the vast majority of CMA merger control cases continue to be primarily focused on horizontal unilateral effects, there have been some significant recent developments in relation to vertical effects analyses in UK merger control. For example, in Intercontinental Exchange, Inc v the Competition and Markets Authority ( CAT 6) the Competition Appeal Tribunal (CAT) agreed with the CMA that vertical mergers can and do give rise to competition concerns and the question of whether a particular merger was likely to give rise to a substantial lessening of competition was necessarily a fact-specific question.
Finally, the UK government has allocated an additional £23.6 million to the CMA's budget for 2018-2019 specifically to enable the CMA to prepare for the United Kingdom’s exit from the European Union. This will include dealing with a potential increase in merger control work with respect to UK aspects of transactions that would otherwise fall exclusively within the European Commission's jurisdiction.
Are there are any proposals to reform or amend the existing merger control regime?
In March 2018 the UK Parliament adopted two statutory instruments which introduced sector-specific share of supply and turnover thresholds where target enterprises are involved in specified activities in connection with military or dual-use goods which are subject to export control, computer processing units and quantum technology. These statutory instruments came into force on 11 June 2018.
The new thresholds introduced are as follows:
- the turnover test – whether the annual UK turnover of the target enterprise exceeds £1 million; and
- the share of supply test – whether the share of supply or purchase of the target business is at least 25% in a substantial part of the United Kingdom (the test is met even if there is no increment in the share of supply).
Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
The primary merger control legislation in the United Kingdom is Part 3 of the Enterprise Act 2002 (as amended). The act was amended by the Enterprise and Regulatory Reform Act 2013.
What is the relevant authority?
The Competition and Markets Authority (CMA) is the authority responsible for carrying out Phase 1 and Phase 2 merger control investigations in the United Kingdom. The CMA assumed this role following the introduction of the Enterprise and Regulatory Reform Act 2013. As a result, it replaced the Office of Fair Trading (OFT) and the Competition Commission, which previously performed Phase 1 and Phase 2 merger control investigations, respectively.
In the course of its investigations, the CMA typically consults the sector regulators (eg, rail, water, energy, telecoms and media) about any mergers in which they are likely to have sector-specific knowledge.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
A transaction is potentially caught by the Enterprise Act (and therefore subject to the possibility of a reference for an in-depth Phase 2 investigation) where a transaction gives rise to a "relevant merger situation" in the United Kingdom. A relevant merger situation arises where:
- two or more enterprises have ceased to be distinct; or
- there are arrangements in progress which, if carried into effect, would lead to two or more enterprises ceasing to be distinct;
- one of the jurisdictional tests is met; and
- the transaction has either:
- not yet completed; or
- completed within the CMA's four-month statutory deadline for reaching a decision on whether to refer the transaction for a Phase 2 investigation.
‘Enterprise’ is defined under the Enterprise Act as "the activities, or part of the activities, of a business". The CMA makes its assessment as to whether the target business constitutes an enterprise for the purposes of the act based on the "totality of all relevant considerations". In this context, the CMA will, in particular, take into account whether the transaction involved:
- a transfer of customer records;
- the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006; and
- some form of consideration attributable to goodwill obtained by the purchaser.
Each assessment will necessarily be fact-specific.
‘Ceasing to be distinct’ is defined under the Enterprise Act as being brought under common ownership or control. ‘Control’, for UK merger control purposes, is not limited to the acquisition of decisive voting control; it may include situations which fall short of this, and the act expressly distinguishes between three levels of control:
- material influence;
- de facto control; and
- a controlling interest (de jure control).
The ability to exercise material influence is the lowest level of control that may give rise to a relevant merger situation. It covers the situation where the acquirer can materially influence policy relevant to the behaviour of the target entity in the marketplace (ie, the management of the target's business, including its strategic direction and its ability to define and achieve its commercial objectives). Material influence over a target enterprise can arise in a number of ways, including as a result of shareholdings (as low as 15%), board representation or other financial or contractual arrangements. In BSkyB/ITV (ME/2811/06) a shareholding of 17.9% was deemed sufficient to give rise to material influence on the basis that historic attendance and voting patterns at ITV's shareholder meetings meant that BSkyB's shareholding was likely to be sufficient to allow it to cast more than 25% of the shareholder votes. It is important to note that a shareholding of less than 15% might exceptionally attract scrutiny when combined with other factors indicating the ability to exercise material influence.
De facto control arises when the purchaser controls a company's policy but holds less than 50% of the voting rights in the target (eg, situations where, in practice, the acquirer has more than 50% of the votes cast at a shareholder meeting).
‘Controlling interest' generally describes the situation where the purchaser holds more than 50% of the voting rights in the target.
Under the Enterprise Act, an increase in control (ie, from material control to de facto control, or from de facto control to a controlling interest) may also give rise to a relevant merger situation (Coca-Cola Company/Fresh Trading Limited (ME/5978/13)). Further, where a person acquires control of an enterprise over a series of transactions or successive events, the act allows the CMA to treat the events as having occurred simultaneously on the date of the last transaction.
The second criterion in relation to jurisdictional thresholds is considered in the next section.
As regards the third criterion for a transaction to be caught under the Enterprise Act, the four-month deadline for a Phase 2 reference decision starts from the earlier of the date on which:
- the transaction was made public; or
- the CMA was informed of it, whichever is the earlier.
Accordingly, where a completed transaction has neither been publicised nor brought to the CMA's attention, the CMA will consider that it remains able to begin a Phase 1 investigation despite more than four months having passed since the date of completion. The CMA can also extend the four-month deadline in certain circumstances – for example, where the merger parties have failed to comply with requests for information made under a Section 109 notice (Vanilla Group/Washstation).
Do thresholds apply to determine when a transaction is caught by the legislation?
With the exception of certain sector-specific thresholds, a transaction will meet the jurisdictional thresholds necessary for a relevant merger situation where:
othe UK turnover associated with the target enterprise exceeds £70 million (the turnover test); or
oat least two of the merging enterprises supply or acquire goods or services of a particular description, and post-transaction the merged entity will supply or acquire at least 25% of those goods or services in the United Kingdom, or a substantial part of it, provided that the merger gives rise to an increment in the share of supply or acquisition (the share of supply test); and
- (subject to limited exceptions) the transaction is not otherwise caught by the EU Merger Regulations.
The turnover and the share of supply tests are separate. Accordingly, in Facebook/Instagram (ME/5525/12) the OFT was able to claim jurisdiction on the basis of the share of supply test, despite Instagram – at the time – never having generated any turnover.
It is important to note that the share of supply test is not an economically defined market share test. For the purposes of this test, the CMA will have regard to "any reasonable description of a set of goods or services" when describing the relevant goods or services being supplied or acquired. Often, this will correspond with a standard recognised by the industry in question – although the CMA may consider other criteria in determining whether the share of supply test is met.
The CMA can also adopt a broad interpretation of what constitutes a substantial part of the United Kingdom provided that the area is of such size, character and importance as to make it worthy of consideration for the purposes of the merger control rules (R v MMC ex parte South Yorkshire Transport Authority ( All ER 289)). Further, the substantial part of the United Kingdom need not represent a single, geographically undivided part, and the geographic area for consideration can be localised (Archant Limited/London newspapers of Independent News and Media Limited).
Where any of the merger parties already supplies or acquires 25% of goods or services of a particular description, the share of supply test will be met if the transaction results in any increment in that share, no matter how low. For example, in Tesco/Capper & Co (ME/4162/09), the OFT assumed jurisdiction over the purchase by Tesco, the UK's largest grocery retailer, of a single grocery retail store in the village of Wroughton.
Sector-specific thresholds exist in relation to enterprises which are, in whole or in part, credit or financial institutions or insurance undertakings as well as in the retail sector as it relates to large grocery retailers.
As of 11 June 2018, sector-specific thresholds were introduced in relation to enterprises which are involved in specified activities in connection with military or dual-use goods which are subject to export control, computer processing units and quantum technology (see above).
There are also certain additional procedural steps for mergers meeting certain criteria in the water and sewerage and healthcare sectors.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
In general, it is the responsibility of the merger parties and their advisers to assess whether a contemplated merger is likely to give rise to a relevant merger situation or competition concerns.
However, in limited circumstances, the CMA may be willing to provide informal advice on a 'one shot' basis in relation to jurisdictional or substantive issues that may arise in relation to a contemplated merger. Having regard to its limited resources, the CMA may agree to provide informal advice where:
- there is evidence of a good-faith intention on behalf of the parties to proceed with the transaction (and such intention is not yet publicly known); and
- the transaction gives rise to a genuine issue which could result in the transaction being referred for a Phase 2 investigation.
Both the content and the fact that parties have applied for informal advice are confidential. This will not trigger a Phase 1 investigation by the CMA. However, it does not prevent the CMA from subsequently investigating a transaction if it goes ahead or – in exceptional circumstances – imposing an initial enforcement order on the parties, prohibiting them from taking any pre-emptive action.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
The CMA can assume jurisdiction over relevant merger situations, irrespective of whether they are ‘foreign-to-foreign’ mergers. As such, where a foreign-to-foreign merger results in a relevant merger situation in the United Kingdom, the CMA can investigate.
Arguments regarding the lack of ‘local impact’ arising from a transaction would apply to the CMA's substantive analysis of the transaction (ie, whether the transaction gives rise to a substantial lessening of competition) rather than its ability to take jurisdiction over the transaction.
What types of joint venture are caught by the legislation?
The creation of a joint venture, or a change in control or influence over an existing joint venture, will be capable of review where it gives rise to a relevant merger situation.
In the case of a start-up joint venture (ie, one in which resources are pooled by parents into a new corporate entity), the relevant question will be whether the activities transferred to the joint venture from one or more of the parents, or acquired from a third party, are sufficient to constitute an enterprise.
Significantly, a joint venture may qualify as a relevant merger situation under the UK merger control regime in circumstances where it would not qualify as a concentration under the EU Merger Regulation.
Process and timing
Is the notification process voluntary or mandatory?
Notification to the Competition and Markets Authority (CMA) is voluntary. Guidance issued by the CMA notes that:
it is perfectly acceptable for parties not to notify a merger which meets the jurisdictional thresholds, and the fact that a merger has not been notified does not negatively affect the CMA's substantive evaluation of the competitive effects of a merger.
Nevertheless, where a merger meets the thresholds for notification and raises the possibility of competition concerns, the merger parties may choose to notify the CMA so as to avoid the risks associated with not notifying a transaction. Such risks include the imposition of an initial enforcement order and the potential divestment of all or part of the acquired business (or parts of its existing business) should the transaction raise competition concerns.
Where parties fail to notify a relevant merger, the CMA can become aware of the merger through the work of its mergers intelligence committee or third-party complaints. The CMA will take a decision to investigate a non-notified decision where it believes that there is a reasonable chance that the test for a reference for a Phase 2 investigation will be met.
Where merger parties do not intend to submit a merger notice to the CMA but nevertheless wish to obtain a degree of comfort that the CMA is unlikely to investigate the transaction, they may submit a short briefing note to the CMA providing information about the merger and explaining why they do not propose to submit a merger notice. For more information, see “Guidance on the CMA's Mergers Intelligence Function” (CMA56).
In response, the CMA may seek additional information from the parties or decide to open an investigation. Alternatively, the CMA may conclude that an investigation into the transaction is unwarranted and will indicate to the parties that it has no further questions at that point. This outcome does not preclude the CMA from asking further questions at a later stage, particularly if further information comes to light. The CMA may open an investigation at any point until the expiry of the four-month statutory deadline for making a reference decision.
As a general rule, the CMA will consider a briefing note only after there is a signed merger agreement (ie, after exchange). In the absence of that, the parties should provide evidence which demonstrates their binding intention to merge.
What timing requirements apply when filing a notification?
As notification is voluntary under the UK merger control regime, no timing requirements apply in relation to the filing of a notification.
What form should the notification take? What content is required?
The CMA's standard template merger notice, together with the accompanying guidance notes, sets out the 'prescribed information' that the CMA considers necessary for the purposes of a satisfactory notification.
The template merger notice was revised in September 2017 to include, among other things:
- new standalone questions relating to:
o the share of supply by value and, where appropriate, volume for the merger parties and their principal competitors in the affected markets; and
o the drivers behind customer purchasing decisions; and
- more detailed requests in relation to the merger parties' price-setting processes, including – where relevant – requests for internal documents which outline the processes and any analyses employed by the parties to set prices.
Notifying parties can choose to supply the requisite information either in the format of the template merger notice or in a written format of their choosing (that indicates clearly where the information responsive to each question in the template merger notice can be found in the submission).
The specific nature and extent of information required as part of a satisfactory notification will vary from case to case, and will depend, for example, on the activities of the merger parties or the extent of overlap in their activities. The areas that the CMA may expect the parties to address as part of a satisfactory notification include:
- market definition;
- horizontal effects, including – where relevant – data in relation to capacities, switching data or variable profit margins for the overlapping products, together with an explanation of how pricing is determined;
- the parties' buyer power post-transaction;
- loss of potential competition as a result of the transaction;
- vertical, coordinated and conglomerate effects;
- market entry and expansion, with a particular emphasis on recent examples in the affected markets rather than potential future entry;
- countervailing buyer power;
- efficiencies arising from the transaction; and
- contact details of the parties' customers, suppliers and competitors. Where (as is often the case) the merger parties do not hold competitor contact details, the CMA will expect the parties to undertake a search of any publicly available data sources.
In addition, parties are generally required to submit large volumes of supporting documentation, including copies of contemporaneous internal documents (eg, the parties' pre-merger business plans, documents setting out the business case for the transaction, post-transaction business plans and internal and external reports analysing competitive conditions within the markets in which a horizontal overlap exists).
As set out in the revised merger notice template, the CMA increasingly places emphasis on the merger parties' internal documents and has shown an increasing willingness to use its powers under Section 109 of the Enterprise Act to require the parties to produce responsive documents. Failure to comply with the CMA's statutory notice can result in a fine being imposed on the merger parties (Hungryhouse/JustEat.co.uk).
The final merger notice must be signed by an individual with the authority to bind the company submitting the merger notice (usually the acquiring company). In signing the merger notice, the individual acknowledges that it is a criminal offence to recklessly or knowingly supply the CMA with information which is false or misleading in any respect.
Is there a pre-notification process before formal notification, and if so, what does this involve?
Yes. Pre-notification discussions take place when the parties to a merger have decided to notify the CMA and wish to engage with it – typically in relation to the contents of a draft merger notice – before formal submission of the final merger notice.
Parties seeking to engage in pre-notification discussions should submit a case team allocation form (available at www.gov.uk/government/publications/mergers-forms-and-fee-information). The CMA will then seek to allocate a case team within five working days.
Pre-notification discussions are an iterative process and are used by the case team to familiarise itself with the affected markets and to request any further evidence, typically through a series of separate requests for information before it begins its 40-working day Phase 1 investigation.
To some extent, pre-notification discussions also provide the parties with an opportunity to informally discuss the CMA's likely approach to a novel issue, or the assessment of a particular competition concern, with the case team.
The CMA "strongly encourages" merger parties to engage in pre-notification discussions at least two weeks before the intended date for completion, even in cases that do not appear to be problematic. However, the pre-notification stage often takes significantly longer than this. In the 2017/2018 financial year, the average length of pre-notification was 28 days (compared with 33 days the previous year).
Where the transaction has already been made public, the CMA may invite third parties to comment on the merger during the pre-notification stage.
Can a merger be implemented before clearance is obtained?
The UK merger control regime is voluntary. Accordingly, clearance is generally not required before the completion of a transaction.
That said, when the CMA is investigating a completed merger, it will normally serve an initial enforcement order on the parties, preventing any further integration of the merger parties' businesses while the order remains in place. The CMA will typically impose such an order as soon as the completed merger comes to its attention.
In exceptional circumstances, the CMA can serve an initial enforcement order on the parties to an anticipated transaction which may prevent completion of the transaction (where the act of completion itself would constitute pre-emptive action).
In addition, the CMA can use initial enforcement orders to require merger parties to unwind any integration that has already taken place. At Phase 1, the CMA would typically use this power only where there are risks of such integration prejudicing the CMA's investigation or impeding it from taking remedial action. At Phase 2, the CMA is more likely to use these powers.
While it is rare, the CMA can and has imposed initial enforcement orders on the parties to anticipated transactions, precluding the parties from taking any steps towards integration, as opposed to preventing completion itself (Linergy Limited/Ulster Farm By-products Limited).
While an initial enforcement order is in place, the merger parties will need to obtain derogations from the CMA if they wish to undertake any substantive actions towards integration.
Guidance from authorities
What guidance is available from the authorities?
The guidance papers issued (or adopted) by CMA include the following:
- “Mergers: Guidance on the CMA's jurisdiction and procedure” (CMA2);
- “Quick Guide to UK Merger Assessment” (CMA18);
- “Guidance on the Review of NHS Mergers” (CMA29);
- “Water and Sewage Mergers” (CMA49);
- “Guidance on the CMA's Mergers Intelligence Function” (CMA56);
- “Retails Mergers Commentary” (CMA62);
- “Mergers: How to Notify the CMA of a Merger”;
- “Guidance on Initial enforcement orders and derogations in merger investigations” (CMA 60); and
- “Mergers: Exceptions to the Duty to Refer and Undertakings in lieu of Reference Guidance” (CMA64).
It has also adopted the following existing Office of Fair Trading (OFT) and Competition Commission (CC) guidance:
- “Merger Assessment Guidelines” (OFT 1254/CC 2) (revised);
- “Merger Remedies: Competition Commission Guidelines” (CC8);
- “Good Practice in the Design and Presentation of Consumer Survey Evidence in Merger Enquiries” (OFT 1230/CC com1);
- “Chairman's Guidance on Disclosure of Information in Merger and Market Inquiries” (CC7);
- “Suggested Best Practice for Submission of Technical Economic Analysis” (CC2 com3); and
- “Government in Markets” (OFT1113).
In addition, the CMA has recently concluded a public consultation on draft guidance which it intends to publish relating to requests for internal documents in merger investigations. The draft guidance notes that "the CMA is likely to use Section 109 notices as standard in future investigations where internal documents are requested from main parties in Phase 1 and Phase 2 investigations".
What fees are payable to the authority for filing a notification?
Fees payable for filing a notification vary according to the UK turnover of the target in the business year preceding either completion of the merger (for completed mergers) or the date of the reference decision (for anticipated mergers). However, the CMA or secretary of state may nominate an alternative reference year where they consider it appropriate.
At the time of writing, the fees payable are:
- £40,000 where the target's UK turnover did not exceed £20 million;
- £80,000 where the target's UK turnover exceeded £20 million but did not exceed £70 million;
- £120,000 where the target's UK turnover exceeded £70 million but did not exceed £120 million; and
- £160,000 where the target's UK turnover exceeded £120 million.
The filing fee becomes payable on the publication by the CMA of its reference decision or, for cases resolved through undertakings in lieu of reference, when the CMA formally accepts these.
No filing fees are payable where:
- the CMA determines that the transaction does not give rise to a relevant merger situation;
- the merger involves the acquisition of an interest that is less than a controlling interest and the CMA investigated the acquisition on its own initiative; or
- the acquirer is a small or medium-sized enterprise.
No further administrative fees are payable for mergers that are referred for a Phase 2 investigation.
Publicity and confidentiality
What provisions apply regarding publicity and confidentiality?
Where a transaction has not yet been made public, the existence of pre-notification discussions and their content will remain confidential. Similarly, both the content and the fact that parties have submitted a briefing note or applied for informal advice are confidential.
On the commencement of a Phase 1 investigation, the CMA will publish a notice on its website and make an announcement via the regulatory news service. Redacted copies of any initial enforcement orders and derogations granted by the CMA will also be published on the CMA's website.
During the Phase 1 investigation, the CMA will invite comments from interested third parties in relation to the transaction and will typically contact the customers, suppliers and competitors of the merger parties directly.
The CMA also announces and publishes its Phase 1 decisions and decisions as to whether undertakings in lieu of reference offered may be suitable to remedy competition concerns, but will provide merger parties and third parties with the opportunity to redact any commercially sensitive information from the text of the decision in advance of doing so.
At Phase 2, the CMA will publish redacted versions of issues statements, any provisional findings, remedies statements, submissions made to the CMA and summaries of hearings and third-party feedback.
Are there any penalties for failing to notify a merger?
No. The UK merger control regime is voluntary.
Procedure and test
Procedure and timetable
What procedures are followed by the authority? What is the timetable for the merger investigation?
There are two investigation phases under the UK merger regime, both of which are conducted by the Competition and Markets Authority (CMA).
At Phase 1, the CMA has a statutory time period of 40 working days in which to decide whether its duty to refer the transaction for a Phase 2 investigation is met. At Phase 2, the CMA has a statutory period of 24 weeks (extendable by up to eight weeks) in which to conduct its investigation.
Where parties notify the CMA of a transaction, the 40-working day timetable commences on the first working day after the CMA has notified the parties that it has received the prescribed information and the existence of the merger has been made public (a satisfactory notification). In practice, the parties will initially submit a draft merger notice, in response to which the case team will request any further information that it requires for the purposes of a satisfactory notification.
In cases where a transaction is not voluntarily notified to the CMA but the CMA learns of it through its mergers intelligence team or third-party complaint, it can send the purchaser an enquiry letter. The purpose of an enquiry letter is to ascertain whether the transaction meets the CMA's jurisdictional thresholds. Where a transaction has already completed, enquiry letters may be accompanied by an initial enforcement order prohibiting any further implementation of the transaction, or possibly even requiring the parties to unwind aspects of the transaction.
Where – following receipt of the merger parties' responses – the CMA considers that it has sufficient information to begin a Phase 1 investigation, it will notify the parties and the 40-working day timetable will commence on the working day after the CMA has confirmed receipt of the necessary information.
During its Phase 1 investigation, the CMA will invite comments from interested third parties in relation to the transaction. Typically, the case team will also contact customers, suppliers and competitors of the merger parties to seek their views on the transaction.
During this period, the CMA will also continue to engage with the merger parties as appropriate and may make further requests for information (eg, in response to issues raised by third parties in relation to the transaction).
At around 15 to 20 working days into the Phase 1 investigation, the CMA will hold a ‘state of play’ discussion with the merger parties, in which they will:
- inform the parties of any material concerns identified by the case team;
- provide feedback on third-party comments; and
- indicate whether they intend to send the parties a so-called ‘issues letter’ (and the theories of harm that will be articulated therein).
Where the CMA does not envisage a possible reference for a Phase 2 investigation, the decision to clear the transaction will be made without the need for an issues letter.
Where the CMA considers that the transaction raises more complex or material competition issues, it will send the parties an issues letter setting out, in a worst-case scenario, the core arguments in favour of a reference. The parties will be invited to make written submissions in relation to the points raised in the issues letter, which may then be supported by oral representations at an issues meeting. The CMA issues meeting will be attended by the parties and representatives from the case team, as well as the CMA's Mergers Unit or CMA officials and the Phase 1 decision maker. The issues letter will be sent at least two working days before the issues meeting.
Following the issues meeting, the CMA will reach a decision on whether its duty to refer the transaction for a Phase 2 reference has been met.
The parties will be informed of the outcome of the CMA's Phase 1 decision shortly before it is publicly announced. The parties will then have an opportunity to review the text of the decision and request any redactions they wish to be made to the non-confidential version of the decision before it is published on the CMA's website and announced via the regulatory news service.
Where competition concerns have been identified, the CMA may nevertheless be willing to clear a transaction subject to the merger parties offering undertakings designed to remedy these concerns.
Undertakings in lieu of reference can be accepted by the CMA (or secretary of state) only for the purpose of remedying, mitigating or preventing the substantial lessening of competition identified, and will be considered only where the remedies proposed to address the competition concerns raised by the merger are clear cut, effective and capable of ready implementation. Accordingly, at Phase 1, remedies will usually be structural in nature. In exceptional circumstances, behavioural remedies may be accepted at Phase 1 (Mastercard/Vocalink (ME/6638/16)).
While the CMA can accept undertakings in lieu of reference only once it has concluded that the transaction should be referred for a Phase 2 investigation, the merger parties may propose remedies to address potential competition concerns at any stage in the CMA's investigation (even at the pre-notification stage).
Once the CMA has found that its duty to refer the transaction for a Phase 2 investigation has been met, merger parties who wish to propose undertakings in lieu of reference have up to five working days starting the day after receipt of the reasons for the CMA's reference decision in which to submit a completed remedies form, together with draft undertakings in lieu of reference to the CMA. The CMA then has a further five working days in which to consider the proposed undertakings in lieu of reference and may provisionally accept either these or a modified version thereof.
Where the CMA provisionally accepts the undertakings in lieu of reference, it will have a further 40 working days (ie, 50 after the merger parties receive the reasons for the CMA's reference decision) in which to formally accept the undertakings in lieu of reference or a modified version thereof. During this period, third parties will be given at least 15 days in which to comment on the draft undertakings in lieu of reference.
The deadline for the CMA to formally accept undertakings in lieu of reference may be extended by up to 40 working days if the CMA considers that there are special reasons for doing so.
Where the CMA rejects the undertakings in lieu of reference offered by the parties, it will refer the decision for a Phase 2 investigation.
The CMA may accelerate a reference for a Phase 2 investigation where this corresponds with the wishes of the merger parties and where there is sufficient evidence available to meet the CMA's statutory threshold for reference.
Where possible, merger parties will generally be incentivised to seek to remedy competition concerns by way of undertakings in lieu of reference. Candidates for fast-track reference are therefore likely to be cases where, if the CMA finds a concern with the merger, that concern would affect the whole (or substantially all) of the transaction.
Where the parties request a fast-track referral during pre-notification discussions, the CMA estimates that the overall time taken from receipt of a satisfactory notification to a Phase 2 reference decision will be 10 to 15 working days. However, it remains possible for merger parties to request a fast-tracked reference at any stage during the Phase 1 investigation (Tesco/Booker (ME/6677/17)).
Following reference to a Phase 2 investigation, parties to an anticipated transaction may request that the commencement of the investigation be suspended by a period of up to three weeks while the parties consider whether they wish to abandon the merger.
Where a transaction does proceed to a Phase 2 investigation, the CMA will conduct a more detailed analysis to consider whether the transaction is more likely than not to give rise to a substantial lessening of competition. While there is a degree of discretion in relation to procedure at Phase 2, the key stages of an investigation will typically include:
- information gathering, both from the merger parties and third parties (possibly by way of a hearing) and from questionnaire and survey data;
- consideration of the need for (modified) interim measures during the Phase 2 investigation;
- publication of an issues statement reflecting the theories of harm on which the CMA will focus, and consideration of the responses provided by the merger parties and third parties;
- a main party hearing (or hearings) with the merger parties, at which the CMA will test the evidence and explore key issues with the parties;
- preparation of and consultation on the CMA's provisional findings and, where relevant, possible remedies;
- consideration of responses to provisional findings and possible remedies;
- preparation of the CMA's final report; and
- implementation of remedies, where relevant.
What obligations are imposed on the parties during the process?
It is a criminal offence punishable by a fine or up to two years' imprisonment (or both) for any party to provide the CMA with false or misleading information during a merger control investigation.
In addition, at both Phase 1 and Phase 2, the CMA can compel parties to provide information and documents or require them to attend as a witness by way of a Section 109 notice.
Where a party fails to comply with the requirements of a Section 109 notice without reasonable excuse, the CMA may impose a financial penalty. The financial penalty may be a fixed amount (up to £30,000), an amount calculated by reference to a daily rate (up to £15,000 per day) or a combination of the two.
Parties must comply with any interim orders served on them and fines of up to 5% of group worldwide turnover can be imposed on parties who breach an order without reasonable excuse.
What role can third parties play in the process?
Third parties play a role in both Phase 1 and Phase 2 investigations, with significant weight attributed to customer feedback.
As part of a satisfactory notification, the merger parties are generally required to provide non-generic contact details for their main competitors, suppliers and customers so as to allow the CMA to target its consultations. In addition, a general invitation to comment is published on the CMA's case page and via the regulatory news service at the beginning of a Phase 1 investigation.
In general, the CMA's requests for third-party feedback are made on an informal basis. However, the CMA will consider using its statutory powers where it considers that such evidence is necessary for its decision.
The CMA also accept complaints regarding non-notified transactions from third parties, which may result in merger control investigations being launched.
What is the substantive test applied by the authority?
Subject to certain limited exceptions, the CMA is under a duty to refer transactions for an in-depth Phase 2 investigation where it forms a reasonable belief – objectively justified by relevant facts – that it is or may be the case that:
- a relevant merger situation has been created; and
- the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market in the United Kingdom for goods or services (ie, the likelihood of a substantial lessening of competition must be greater than fanciful).
Where the CMA believes that the transaction may constitute a relevant merger situation which may give rise to a substantial lessening of competition, it may exercise its discretion not to refer a transaction for a Phase 2 investigation where:
- the aggregated annual value of markets concerned in the United Kingdom is less than £5 million or between £5 million and £15 million, and the CMA considers that the expected consumer harm resulting from the merger is materially greater than the average public costs of a Phase 2 reference (the de minimis exception);
- any relevant customer benefits outweigh the substantial lessening of competition and any adverse effects of the substantial lessening of competition; or
- the merger arrangements are insufficiently advanced or insufficiently likely to proceed to justify a reference.
At Phase 2, the CMA will consider the same two questions but will apply a ‘balance of probabilities’ threshold to its analysis (ie, it will consider whether the transaction is more likely than not to give rise to a substantial lessening of competition, a higher threshold than that applied at Phase 1). If the CMA answers both questions in the affirmative, it must then consider remedies.
The CMA will consider a transaction as giving rise to a substantial lessening of competition when it has "a significant effect on rivalry over time, and therefore on the competitive pressure on firms to improve their offer to customers or become more efficient or innovative". Accordingly, a transaction that gives rise to a substantial lessening of competition will be expected to lead to an adverse effect for customers.
Does the legislation allow carve-out agreements in order to avoid delaying the global closing?
The UK merger control regime is voluntary. As such, the CMA will prohibit the merger parties from completing an anticipated transaction only in exceptional circumstances.
The CMA recognises that parties may be subject to other regulatory processes and will take account of such constraints when conducting its review.
Test for joint ventures
Is a special substantive test applied for joint ventures?
What are the potential outcomes of the merger investigation? Please include reference to potential remedies, conditions and undertakings.
Where, following a Phase 1 investigation, the Competition and Markets Authority (CMA) considers that a transaction qualifies as a ‘relevant merger situation’, it can decide to either:
- unconditionally clear the transaction on the basis that its duty to refer is not met;
- conditionally clear the transaction (ie, subject to remedies);
- refer the transaction for a Phase 2 investigation; or
- in certain circumstances, apply its discretion to clear the transaction (eg, where the de minimis exception applies).
Of the cases reviewed in the CMA's 2017/2018 financial year:
- 60% were unconditionally cleared in Phase 1;
- 20% were conditionally cleared;
- 5% were subject to the de minimis exception; and
- fewer than 15% of Phase 1 investigations resulted in a reference to Phase 2.
At Phase 2, the inquiry group can decide to either:
- unconditionally clear the transaction;
- conditionally clear the transaction (ie, subject to the imposition of remedies); or
- prohibit the transaction.
Of the six Phase 2 decisions reached by the CMA in its 2017/2018 financial year, four transactions were unconditionally cleared and two were cleared subject to the imposition of structural remedies.
Right of appeal
Is there a right of appeal?
Under the Enterprise Act, any person aggrieved by a decision of the Competition and Markets Authority (CMA) or secretary of state in connection with a reference or possible reference in relation to a merger situation may apply to the Competition Appeal Tribunal for a review of that decision. For the purposes of the Enterprise Act, 'decision' includes a failure to take a decision permitted or required by the act.
In determining an application for a review, the Competition Appeal Tribunal must apply the same principles as would be applied by a court on an application for judicial review.
The Competition Appeal Tribunal cannot impose its own decision on the merits of the case. However, it may dismiss the application or quash the whole or part of the decision to which it relates. Where the Competition Appeal Tribunal quashes the decision – whether in whole or in part – it will refer the matter back to the original decision maker with a direction to reconsider the decision in accordance with the Competition Appeal Tribunal’s ruling.
Unless otherwise directed by the Competition Appeal Tribunal, the decision under review is not suspended pending the outcome of that review.
Persons on whom a penalty is imposed in connection with a merger control investigation can apply to the Competition Appeal Tribunal to challenge the imposition, nature or amount of the penalty or the date by which the penalty falls due. Pending the outcome of the review, payment of the penalty will not be required.
Where it considers it appropriate to do so, the Competition Appeal Tribunal may quash the penalty, substitute the penalty for another penalty of a different nature, or of a lower amount, or impose alternative dates for the payment of the fine.
A subsequent appeal on any point of law arising from a decision of the Competition Appeal Tribunal, or the amount of a penalty, should be made to the Court of Appeal, or in the case of Competition Appeal Tribunal proceedings in Scotland, the Court of Session.
Do third parties have a right of appeal?
Third parties who are aggrieved by a decision of the CMA or secretary of state in connection with a reference or possible reference in relation to a merger situation can challenge the decision. For example, in IBA Health Ltd v Office of Fair Trading ( CAT 27), IBA Health Limited successfully lodged an appeal for a review of the decision of the Office of Fair Trading not to make a reference for a Phase 2 investigation in relation to the anticipated acquisition by iSOFT Group PLC of Torex PLC.
What is the time limit for any appeal?
An application for a review of a decision in connection with a reference or possible reference must be lodged with the Competition Appeal Tribunal no later than four weeks from the applicant being notified of the decision or the date on which the decision was published, whichever is the earlier.
An application for a review of a decision in connection with a penalty must be lodged with the Competition Appeal Tribunal no later than 28 days from the day on which the copy was served on the person concerned, or within such other time as specified by the secretary of state.